Hong Kong: China Telecom Corp Ltd, the smallest of the country’s three carriers, posted a 10 per cent drop in quarterly net profit on Wednesday, its biggest decline since the second quarter of 2010 mainly due to higher handset subsidies.

China Telecom, which competes with China Mobile and China Unicom, reported a first-half net profit of 8.814 billion yuan ($1.4 billion), down from a revised 9.616 billion yuan a year earlier.

The market was expecting China Telecom to report a first half net profit of 8.72 billion yuan, according to four analysts surveyed by Reuters.

That meant that the carrier recorded a net profit of 4.54 billion yuan in the April-June quarter, compared with a consensus forecast of 4.45 billion yuan and down from 5.046 billion yuan a year earlier, according to calculations made by Reuters from the company data.

China Telecom has 144.18 million mobile subscribers as of June, including 50.96 million 3G subscribers.

It said it would acquire the 3G assets of its parent company, state-owned China Telecom Corp, for an initial consideration of 84.6 billion yuan (Dh48.9 billion, $13.3 billion), a move analysts said would reduce the carrier’s costs over time of leasing bandwidth as the number of its subscribers increases.

The move, announced by the company as it released its first-half results, reflects its ambition to attract more smartphone users. China has a billion mobile phone subscribers.

China Telecom’s shares were up 0.5 per cent after the results. The broader Hang Seng index was down 0.8 per cent.

“Though we remain positive on the long-term outlook of CT, we believe higher marketing and handset subsidy expenses will weigh on its profit margins in the near term,” Alen Lin, an analyst with BNP Paribas in Hong Kong, wrote in a note before the results. He said the comment remained valid following the earnings report.

“We believe the shift toward high-tier devices such as iPhone 4S will improve CT’s long-term subscriber profile at the expense of short-term profitability,” the note said.

China Telecom signed a deal with Apple Inc earlier this year to carry iPhones as part of its efforts to draw more higher-end 3G users into its network.

“The company believes that the launch of the iPhone to expand the high-end market would require an appropriate increase in marketing initiatives which would create short-term pressure on profitability, however, it would enhance long-term sustainable growth and value creation for the company,” China Telecom said in its results statement.